Decade of deterioration in govt. credit ratings set to end: S&P

REUTERS: A decade-long, post-financial crisis deterioration in governments’ credit ratings looks set to end in 2018, S&P Global said yesterday.

Data from the rating agency showed there had been twice as many sovereign downgrades as upgrades on average over for the last decade and in 2017 so far.

It has also pushed down average sovereign rating around the world by one notch over the past 10 years. It now stands at ‘BBB-’, just inside so-called ‘investment grade’, but the tide now looks to be turning.

For the first time since March 2008, the balance of rating ‘outlooks’ - which give an indication of the direction of travel of a rating - is positive, albeit only minimally so.

“This suggests that the slow but inexorable slide in sovereign ratings over the past decade may come to a halt in 2018,” S&P’s top sovereign analyst Moritz Kraemer said.

“Potentially, we may even see a very mild recovery of the average rating. In this sense, 2018 could be a watershed year.”

The shift comes against the backdrop of a global economic recovery which has been nurtured by unprecedented levels of monetary stimulus.

Interest rates of many of the world’s leading central banks are still close to zero. The balance sheet of the G4 central banks alone has quadrupled from pre-crisis levels to reach almost $16 trillion, approaching 20 percent of world GDP. Despite the brighter outlook for ratings globally, S&P cautioned that the recovery was likely to be uneven.

Kraemer said even relatively small shifts back to advanced economies’ securities by investors relative to their outstanding volume, can have a meaningful impact on some emerging markets.

“Other things being equal, one can expect sovereigns more at risk of a capital flow reversal would be those that display a higher dependency on foreign savings (and thus capital inflows) to finance their economic models.”

Looking at a total of six different variables, he said those most at risk from monetary tightening are, in descending order, Venezuela, Bahamas, Mozambique, Montenegro, Turkey, Ethiopia, Pakistan, Kenya, Oman, and Sri Lanka.

Among large emerging markets, Turkey appears the most exposed. It was among the original “Fragile Five” in 2013, when the U.S. Federal Reserve indicated it could soon start winding down its quantitative easing program.

Among the other original five, South Africa, Indonesia, and India are “firmly in midfield”, Kraemer added, while Brazil is now among the most resilient emerging economies.